Under section 1446, a partnership (foreign or domestic) that has income effectively connected with a U.S. trade or business (or income treated as effectively connected) must pay a withholding tax on the effectively connected taxable income that is allocable to its foreign partners. A publicly traded partnership must withhold tax on actual distributions of effectively connected income. See
Publicly Traded Partnerships, later.

This withholding tax does not apply to income that is not effectively connected with the partnership's U.S. trade or business. That income is subject to NRA withholding tax, as discussed earlier in this publication.

The partnership, or a withholding agent for the partnership, must pay the withholding tax. A partnership that must pay the withholding tax but fails to do so may be liable for the payment of the tax and any penalties and interest.

The partnership must determine whether a partner is a foreign partner. A foreign partner can be a nonresident alien individual, foreign corporation, foreign partnership, foreign estate or trust, foreign tax-exempt organization, or foreign government.

A partner that is a foreign person should provide the appropriate Form W-8 (as shown in Chart D) to the partnership.

Partners who have otherwise provided Form W-8 to a partnership for purposes of section 1441 or 1442, as discussed earlier, can use the same form for purposes of section 1446 if they meet the requirements discussed earlier under
Documentation. However, a foreign simple trust that has provided documentation for its beneficiaries for purposes of section 1441 must provide a Form W-8 on its own behalf for purposes of section
1446.

The partnership may not rely on the certification if it has actual knowledge or has reason to know that any information on the form is incorrect or
unreliable.

The partnership must keep the certification for as long as it may be relevant to the partnership's liability for section 1446
tax.

Chart D. Documentation for Foreign Partners*

IF you are a:

THEN provide to the partnership Form:

Nonresident alien

W-8BEN

Foreign corporation

W-8BEN

Foreign partnership

W-8IMY

Foreign government

W-8EXP

Foreign grantor trust**

W-8IMY

Certain foreign trust or foreign estate

W-8BEN

Foreign tax-exempt organization(including a private foundation)

W-8EXP

Nominee

W-8 used by beneficial owner

* A partnership may substitute its own form for the official version of Form W-8 to ascertain the identity of its partners.

**A domestic grantor trust must provide a statement as shown in Regulations section 1.1446-1(c)(2)(ii)(E) and documentation for its grantor.

The amount a partnership must withhold is based on its effectively connected taxable income that is allocable to its foreign partners for the partnership's tax year. However, see
Publicly Traded Partnerships, later.

The foreign partner's share of the partnership's gross effectively connected income is reduced
by:

The partner's share of partnership deductions connected to that income for the
year.

The partner's tax treaty benefits related to that income (see Chart D for
documentation).

The partnership may reduce the foreign partner's share of partnership gross effectively connected income
by:

State and local income taxes the partnership withholds and pays on behalf of the partner on current year effectively connected taxable income allocated to the
partner.

The foreign partner's partner-level deductions and losses that the partner certifies to the partnership
as:

Carried forward from a prior year,

Properly allocated to gross effectively connected income of the partner's trade or business in the United States, and

Reasonably expected to be available and claimed on the partner's U.S. income tax
return.

To certify the deductions and losses, a partner must submit to the partnership Form 8804-C, Certificate of Partner-Level Items to Reduce Section 1446
Withholding.

If the partner's investment in the partnership is the only activity producing effectively connected income and the section 1446 tax is less than $1,000, no withholding is required. The partner must provide Form 8804-C to the partnership to receive the exemption from
withholding.

A foreign partner may submit a Form 8804-C to a partnership at any time during the partnership's year and prior to the partnership's filing of its Form 8804. An updated certificate is required when the facts or representations made in the original certificate have changed or a status report is
required.

The withholding tax rate on a partner's share of effectively connected income is 39.6% for noncorporate partners and 35% for corporate partners. However, the partnership may withhold at the highest rate applicable to a particular type of income allocated to a partner provided the partnership received the appropriate documentation. See Regulations section
1.1446-3(a)(2)(ii).

A partnership must make installment payments of withholding tax on its foreign partners' share of effectively connected taxable income whether or not distributions are made during the partnership's tax year. The amount of a partnership's installment payment is the sum of the installment payments for each of its foreign partners. The amount of each installment payment can be figured by using Form 8804-W.

Date payments are due.
Payments of withholding tax must be made during the partnership's tax year in
which the effectively connected taxable income is derived. A partnership must
pay the IRS a part of the annual withholding tax for its foreign partners by the
15th day of the 4th, 6th, 9th, and 12th months of its tax year for U.S. income
tax purposes. Any additional amounts due are to be paid with Form 8804, the
annual partnership withholding tax return, discussed later.

A foreign partner's share of withholding tax paid by a partnership is treated as distributed to the partner on the earliest of:

The day on which the tax was paid by the partnership,

The last day of the partnership's tax year for which the tax was paid,
or

The last day on which the partner owned an interest in the partnership during that year.

The amount treated as distributed to the partner is generally treated as an advance or draw under Regulations section 1.731-1(a)(1)(ii) to the extent of the partner's share of income for the partnership
year.

In most cases, a partnership must notify each foreign partner of the tax withheld on its behalf within 10 days of the installment payment date. No particular form is required for this notification. For more information on the substance of the notification and exceptions, see Regulations section
1.1446-3(d)(1)(i).

If a domestic partnership disposes of a U.S. real property interest, the gain is treated as effectively connected income and the partnership or withholding agent must withhold following the rules discussed here. A domestic partnership's compliance with these rules satisfies the requirements for withholding on the disposition of U.S. real property interests (discussed later).

If a foreign partnership disposes of a U.S. property interest, the transferee must withhold under section 1445(a), although the gain also is treated as effectively connected income. The foreign partnership may credit the amount withheld under section 1445(a) that is allocable to foreign partners against its section 1446 tax
liability.

The withholding tax liability of the partnership for its tax year is reported on Form 8804. Form 8804 is also a transmittal form for Forms
8805.

Any additional withholding tax owed for the partnership's tax year is paid (in U.S. currency) with Form 8804. A Form 8805 for each foreign partner must be attached to Form 8804, whether or not any withholding tax was paid.

File Form 8804 by the 15th day of the 4th month after the close of the partnership's tax year. However, a partnership that keeps its books and records outside the United States and Puerto Rico has until the 15th day of the 6th month after the close of the partnership's tax year to file. If you need more time to file Form 8804, you may file Form 7004 to request an automatic 5-month extension of time to file. Form 7004 does not extend the time to pay the tax.

Form 8805 is used to show the amount of effectively connected taxable income and any withholding tax payments allocable to a foreign partner for the partnership's tax year. At the end of the partnership's tax year, Form 8805 must be sent to each foreign partner on whose behalf section 1446 tax was withheld or whose Form 8804-C the partnership considered, whether or not any withholding tax is paid. It must be delivered to the foreign partner by the due date of the partnership return (including extensions). A copy of Form 8805 for each foreign partner also must be attached to Form 8804 when it is filed. Also attach the most recent Form 8804-C, discussed earlier, to the Form 8805 filed for the partnership's tax year in which the Form 8804-C was
considered.

A copy of Form 8805 must be attached to the foreign partner's U.S. income tax return to take a credit on its Form 1040NR or Form 1120-F.

This form is used to make payments of withheld tax to the United States Treasury. Payments must be made in U.S. currency by the payment dates (see
Date payments are due, earlier). See the Instructions for Form 8804-C for when you must attach a copy of that form to Form
8813.

A penalty may be imposed for failure to file Form 8804 when due (including extensions). It is the same as the penalty for not filing Form 1042, discussed earlier under
Failure to file Form 1042.

A penalty may be imposed for failure to file Form 8805 when due (including extensions) or for failure to provide complete and correct information. The amount of the penalty depends on when you file a correct Form 8805. The penalty for each Form 8805 is the same as the penalty for not filing Form 1042-S, discussed earlier under
Failure to file correct Form 1042-S.

If you fail to provide a complete and correct Form 8805 to each partner when due (including extensions), a penalty may be imposed. The amount of the penalty depends on when you provide the correct Form 8805. The penalty for each Form 8805 is the same as the penalty for not providing a correct and complete Form 1042-S on time, discussed earlier under
Failure to furnish Form 1042-S to recipient.

No penalty is imposed if you meet certain requirements. The rules are the same as for Form 1042-S. See
Exception in
Failure to file correct Form 1042-S
and
Exception in
Failure to furnish Form 1042-S to recipient.

If you intentionally disregard the requirement to file Form 8805 when due, to provide Form 8805 to the recipient when due, or to report correct information, the penalty for each Form 8805 (or statement to recipient) is the greater of $250 or 10% of the total amount of the items that must be reported, with no maximum
penalty.

A partnership that has not been assigned a U.S. EIN must obtain one. If a number has not been assigned by the due date of the first withholding tax payment, the partnership should enter the date the number was applied for on Form 8813 when making its payment. As soon as the partnership receives its EIN, it must immediately provide that number to the IRS.

To ensure proper crediting of the withholding tax when reporting to the IRS, the partnership must include each partner's U.S. TIN on Form 8805. If there are partners in the partnership without identification numbers, the partnership should inform them of the need to get a number. See
U.S. Taxpayer Identification Numbers, earlier.

A publicly traded partnership (PTP) that has effectively connected income, gain, or loss must pay withholding tax on any distributions of that income made to its foreign partners. A PTP must use Forms 1042 and 1042-S (Income Code 27) to report withholding from distributions. The rate of withholding is 39.6% for noncorporate partners and 35% for corporate partners.

A PTP is any partnership an interest in which is regularly traded on an established securities market or is readily tradable on a secondary market. These rules do not apply to a PTP treated as a corporation under section 7704 of the Code.

The withholding agent under this section can be the PTP or a nominee. For this purpose, a nominee is a domestic person that holds an interest in a PTP on behalf of a foreign person. The nominee is treated as the withholding agent only to the extent of the amount specified in the qualified notice given to the nominee by the PTP. If a nominee is designated as the withholding agent, the obligation to withhold is imposed solely on the nominee. The nominee must report the distributions and withheld amounts on Forms 1042 and 1042-S. For more information, see Regulations section 1.1446-4(b) and
(d).

The partnership or nominee must withhold tax on any actual distributions of money or property to foreign partners. The amount of the distribution includes the amount of any section 1446 tax required to be withheld. In the case of a partnership that receives a partnership distribution from another partnership (a tiered partnership), the distribution also includes the tax withheld from that distribution.

If the distribution is in property other than money, the partnership cannot release the property until it has enough funds to pay over the withholding tax.

A publicly traded partnership that complies with these withholding requirements satisfies the requirements discussed later under
U.S. Real Property Interest. Distributions subject to withholding include:

Amounts subject to withholding under section 1445(e)(1) of the Code on distributions pursuant to an election under Regulations section 1.1445-5(c)(3),
and

Amounts not subject to withholding under section 1445 of the Code because the distributee is a partnership or is a foreign corporation that has made an election to be treated as a domestic
corporation.